Energy and Food Prices Soft on the MonthFollowing December’s soft performance, headline consumer inflation was unchanged in January as the decline in energy prices offset gains in other goods and services. For the third straight month, the energy sector heavily influenced the report, falling 1.7 percent. As was witnessed in yesterday’s PPI report, unseasonally adjusted gasoline prices actually increased in January, up 0.3 percent, but on a seasonally adjusted basis, prices fell on the month, down 3.0 percent. With February retail gasoline prices already averaging 30 cents over the January average, and with the seasonals less favorable this month, it is very likely we will see a significant reversal in energy inflation in February.
Breaking a string of ten consecutive monthly increases, unchanged food prices also contributed to the headline’s soft reading. After rising at a 2.2 percent annualized rate in the fourth quarter, the food at home component remained flat in January as major grocery store food indices were mixed. Food prices away from home continue to edge higher, up 0.1 percent on the month, bringing the year-over-year rate to 2.3 percent. While food inflation is expected to pick up in the coming months, at least to date the pass-through from higher wholesale prices has been limited.
The market-driving news in this report was the stronger-than-expected gain in core CPI. Increasing at the strongest monthly pace since May 2011, core consumer prices jumped 0.3 percent following benign readings in December and November. Strength was led by sizeable gains in apparel, hotel rates and airline fares. Shelter costs, which account for roughly forty percent of core CPI, continue to strengthen in tandem with the housing market recovery, rising 0.2 percent. While certainly the recent upward trend in the three-month annualized rate suggests continued upward price pressure on the core CPI, today’s soft demand environment is not conducive to runaway inflation. We continue to expect modest headline and consumer price inflation in 2013.